My oldest brother owns a residential framing company in Edmonton, Alberta. He's younger than me by two years but I often think that his simple life of working outside doing physical labour gives him a fresh and commonsense outlook on things.
For example, he once told me that a carpenter's measurements must always be exact when laying a foundation. "If you don't measure twice and cut once, and your measurements are out, even by a quarter inch at the base, by the time you build the roof that misalignment will be exponentially worse and you could end up with walls that aren't meeting at 90 degree angles" he explained.
I'm sure that there is a physics equation for this compounding phenomenon, but to me his words were a warning that you better follow your plan as close as possible if you want to end up living in a square house.
I often think of my brother's advice in December when the budgeting time comes around. There's nothing like developing an annual budget to put me in a foul mood. No matter how I procrastinate, I can never completely escape the dreaded exercise of trying to do more with the same, stretching revenues as far as possible while reducing expenses, or trading first draft optimism for third draft realism. And yet, a solid budget is the foundation for a stronger year in business by providing the monthly measuring stick by which we determine whether we are following the plan.
I'll admit that there are two parts to budgeting that I do enjoy: 1) dreaming about what is possible over the next year and doing the background work to ensure that these plans are financially supported and 2) looking at how all the nice tidy numbers line up on the first of January before the 'actuals' mess them all up.
In all seriousness, it is the dreaming, or the thoughtful strategy that is difficult to find time to do but is absolutely necessary. Developing a budget forces business people to set time aside to plan for the future; this is not easy to do when you're running a business and time is limited. I find the best way to make time is to 'time-block': set aside blocks of 2-3 hours once or twice a week to dedicate to the budget process. This means closing your email, putting the phones to voice mail and, for me, sticking a pair of noise canceling headphones on and just getting lost in the process.
I'm not an expert in financial accounting but I do have a series of steps that I use to make budgeting more pleasant. First I use a template that my monthly financials can be pulled from. I start by plugging in the fixed costs that I know will not change: telecommunications, wages, lease payments, etc. Once those are in place, then I move on to a detailed analysis of last year's semi-variable expenses that may be cyclical such as travel, meals and entertainment, and advertising. Finally, I see how much room is left within the expense side and compare this wiggle room with my wish list of elective "wants" or variable costs: new signage, flower baskets in the summer, new equipment, etc.
A couple of things to keep in mind is that one business's fixed costs, like salaries in my case, may be another business's variable costs for example if your wages change depending on sales for a retail business. Another suggestion is to make sure to account for inflation and natural increases to your expenses at a rate that is reasonable. Most importantly, check in with local trade associations, accountants and others to ensure that you are planning for a profit margin that is reasonable and within industry standards.
And finally, the one thing I've learned over the last few years of budgeting is that it is not an exact science, it is based on commonsense and thoughtful planning. To bring us back to my original building analogy, it is a tool in your carpenter's belt meant to help not hinder and to guide not blame. So, don't fret if your plan doesn't match your reality but at the same time don't keep building the house if the foundation is out of alignment. Take time to readjust your spending or your targets so that the walls are straight and the roof is level.
Until next time, stay in the black and keep coming back.
Jennifer Brandle-McCall is CEO of the Prince George Chamber of Commerce.
